Thursday 26 February 2009

Caisse de dépôt - What's Not Being Said that Should Be

The enormous $39.8 billion or 25% investment loss by the Caisse in 2008 has received a lot of main stream press coverage of the "how could this happen", "who is at fault" and "never happen again" kind.

Maybe it just has not hit home yet but Quebecois including most of my relatives need to be concerned about the implications for them since the Caisse manages their public pension funds. Unfortunately, there seems to be little questioning or analysis by mainstream media, nor hard data forthcoming from the authorities on the key questions - what is the effect of the loss on the ability to provide promised pensions?

Yesterday in a press conference, Quebec Finance Minister Monique Jérôme-Forget when asked whether the loss would result in contributors having to pay more responded with the weak and unsatisfactory "we don't know that yet". Apparently several of the pension funds who rely on the Caisse to generate the investment return to pay for pensions issued statements that contributions would not be raised as a consequence, nor that the pensions are in danger.

There isn't any data to back this up however. An audit of the solvency of those funds, just as is routinely done for private pension funds by regulators, would seem to be an urgent priority.

A few worrying notes on this situation:
  • the five year return of 3.1% by the Caisse was barely positive in real terms as inflation averaged about 2%
  • the five year benchmark index return cited by the Caisse is 4.1% per year so the Caisse has under-performed by 1% a year; is the 4.1% the minimum required to meet the objectives of pension plans? if it is, then the plans have a problem
  • some pension plans are apparently (see sentence at bottom of this Globe article by Konrad Yakabuski) wanting to remove their funds from management by the Caisse
  • compared to its benchmarks, the Caisse under-performed in almost every asset class in 2008, whether domestic or foreign, hedged or unhedged, which seems to indicate its whole system was flawed, not just ABCP or the effects of exchange rates; only private equity investments outperformed, and that by a lot
  • the Caisse admin cost of 21.2 basis points or 0.212% ( somewhat similar to the MER of mutual funds) compares poorly to the 0.15% of the CPPIB as I posted in my look at the CPPIB - why should the bigger Caisse have a higher MER, isn't there supposed to be an economy of scale? Is this higher admin cost a symptom of unduly aggressive active management?
  • to use the example of one of the pension plans whose funds are managed by the Caisse, a news report in April 2008 stated that the RREGOP (Régime de retraite des employés du gouvernement et des organismes publics) had a surplus of $6 billion. The Caisse website says the RREGOP had $46 billion invested with it as of Dec.31, 2007. If the RREGOP fund lost the Caisse average of 25%, then it might be down 0.25*$46 billion = $11.5 billion, which would wipe out the surplus and create a substantial deficit.
  • this Canoe article raises the possibility of contribution rate increases by the RREGOP in 2011 but cites a CARRA press release saying that retirement benefits would not be cut. How can they say one but not the other with any believability? Money doesn't come out of thin air - if the investment returns are now in a giant hole, who will pay - present retirees, future retirees or the taxpayer?
  • with all the criticism of unduly risky practices at the Caisse, it is sure the changes will bring about less aggressive / less risky investing by the Caisse in future, which of course will lower possible returns. So there will be less chance to make up any shortfall.
  • the final worrying factor is that there seems to a common view, as I have posted recently, that future market returns will be quite a bit less than they have been in the last 20-25 years. If that's the case, the shortfall will be even harder to make up.
Instead of playing the finger pointing exercise in which politicians and Caisse managers take turns saying it wasn't their fault, their time would be better spent telling the public the truth about the future and thinking how to get out of the mess.

Tuesday 24 February 2009

iShares Tax Info for 2008 Now Available

Those who use iShares Canada ETFs can get started on tax preparation in advance of receiving T3s from brokers as BGI published the 2008 tax distribution breakdown yesterday. The press release conveniently lists the data for all the iShares funds on one page. As of this morning, the distribution data doesn't show up yet in the individual fund information on the website.

To do all the tax book-keeping for 2008, one must adjust the Adjusted Cost Base by subtracting the Return of Capital (on the press release) and adding the Reinvested Distribution per Unit, which only appears under each ETF's Distribution History link, such as this one for XIU (it would have been helpful for BGI to stick that number on the press release too).

Monday 23 February 2009

Historical Arguments for What the Stock Market Bottom Will Look Like

Stock markets have already seen a huge decline but has the bottom been reached yet? A couple of commentators with serious-looking historical data and credentials seem to say probably not.

Yale prof and Irrational Exuberance author Robert Schiller in this short note and video interview on Yahoo Finance says the current S&P 500 P/E ratio (calculated using his Cyclically Adjusted P/E Ratio - CAPE - which averages the last ten years instead of only the most recent year) of just under 14x indicates there is likely some way to go - he's looking at 10x, which would mean almost a 30% further drop from where we are today. Yikes! That would entail the S&P 500 at 550 or so. If the TSX followed suit, the TSX Composite would go down to 5600.

A similar view is the cheerily titled While Rome Burns by John Mauldin on the Big Picture blog. Two of charts titled Reversion Beyond the Mean near the bottom of the long post shows how the S&P 500 has overshot what is termed long term average P/E value of 18x in past major crashes to go below 10x.

These values are not too far off the study by the IMF I noted in Recession to Last 2-3 Years? back on October 28th, which related average stock market declines of 50% in a credit cum real estate crunch.

To use an airplane analogy, we are in the midst of severe turbulence, a number of passengers who had not fastened their financial seatbelts have been bruised, people are screaming and scared for their lives. The heartening thing to remember is that as long as our "pilots" don't screw up, planes rarely (11-13% of the time according to Wikipedia) if ever crash because of weather. More than half the time it is pilot error. Are Harper, Brown, Obama, Hu, Merkel et al going to be good enough under pressure?

Saturday 21 February 2009

Is the RRSP Refund as Contribution to TFSA Dipsy-doodle Worth It?

Some commentators have suggested the best way to solve the conundrum of deciding whether to contribute to an RRSP first or a TFSA is to make the RRSP contribution then use the tax refund to put into the TFSA.

Does this make sense? On first glance, one gets the impression that more is being protected from tax. For example, if you put $1000 into an RRSP and are in a 40% marginal tax bracket (despite the fact that no such tax bracket exists, it is convenient to use a round number for illustrative calculations), you get 40% x $1000 = $400 back, which can be put into a TFSA, which seems to result in a total of $1400 being "saved" while a straight $1000 in a TFSA produces no tax refund and so only $1000 is set aside.

The answer is that you are no better off doing the RRSP refund into TFSA than the straight TFSA contribution if you stay in the same tax bracket when you withdraw the RRSP money. Save yourself the trouble. Want to see the numbers? Look at the table below where I've worked through a simple example.

There are other factors to consider in deciding between the TFSA and the RRSP, most of which come out in favour of the TFSA as various people have said like Ed Rempel on and on Million Dollar Journey. The one thing that still goes in favour of the RRSP is when your tax rate upon withdrawal will be lower than at contribution. It may still not come out in favour of the RRSP if you lose income-tested benefits like OAS and GIS. has a handy calculator in which you can plug in numbers to test RRSP vs TFSA with differing tax rates and considering the OAS and GIS clawbacks.

Thursday 19 February 2009

2008 in Historical Perspective: Credit Suisse Global Investment Returns Yearbook 2009

The bible of historical equity and bond returns has just come out with the 2009 issue. The Credit Suisse Global Investment Returns Yearbook 2009 puts 2008 in long term perspective with data going back over a century. There are 20 pages of commentary by authors of the acclaimed book Triumph of the Optimists Elroy Dimson, Paul Marsh and Mike Staunton (DMS) as well as Jonathon Wilmot, chief global strategist in investment banking at Credit Suisse. Canada, the UK and the USA are among the 17 countries with one-page profiles of their performance. The 48 page document is superbly produced with colourful, insightful graphs instead of tables of numbers.

Two reasons to read this document:
  1. gain proper expectations for recovery of markets, for return levels of bonds, t-bills/cash and equities
  2. general ideas for investment winners and losers in the short to medium term in the brave new world of less debt

Quotes of note:
"We believe the basic principles remain true – that stocks still offer the best long-term returns despite their volatility – and that investors should keep faith with stocks." DMS page 5
"... even a decade is too short to judge stock returns. ... The last decade has been the lost decade." DMS
"... even in a crash, when correlations rise significantly, global diversification still makes sense." DMS
"... increased consolidation and industry concentration has in the past always been a feature of depressions or periods with a substantial overhang of excess capacity. Large firms with strong balance sheets, resilient cash flows, the ability to finance growth internally and/or continued access to credit markets are the potential winners in this process. As long ago as the 1870s, the depressed state of the economy and credit markets allowed people like Carnegie and Rockefeller to buy many smaller firms and competitors at fire sale prices, and build vast new business empires." Wilmot

Best performing equity markets from 1900 to 2008
1 - Australia at 7.9% real compounded return
2 - Sweden 7.2%
3 - South Africa 7.1%
4 - USA 6.0%
5 - Canada 5.9%
6 - UK 5.1%

It comes as a bit of a shock to read that in that lost decade of 1999 to 2008 bonds beat equities by 1.9% compounded annually for Canada, the same relationship being true globally as well. As DMS put it, equity investors "... received a savage reminder that the very nature of the risk for which they sought a reward means that events can turn out badly, even over multiple years.

DMS suggest we should expect equities to return only 3 to 3.5% more than t-bills from here on (as opposed to the 4.2% world average in the past). Later Wilmot shows a long term trend line (back to 1850) of 6.2% for US equities. There are some notable periods as long as 15 years of negative returns. So who knows, huh?

Another striking figure is DMS' estimate that the Dow Jones index has about a 50% chance of breaking through its all-time high by (start holding your breath) 2022, 13 years from now! Are your expectations getting lower like mine?

I am also considering praying for the banking system given the comments on page 23 about the effect of collapse of banking and credit in 1857 and in 1931. It seems that in the big big picture, Nortel going under doesn't matter, nor will GM and Chrysler (as they surely eventually will) but much as many hate them, if the US/UK/Canadian/Japanese/European banks start to go down en masse, we will be in for a much worse time than we are now experiencing.

Hat tip to Mebane Faber's World Beta blog where I found the mention and link to the document.

Wednesday 18 February 2009

Open Letter to Paul Martin: Help!

Dear Paul Martin,
In reading your autobiography Hell or High Water, I have been reminded of your undoubted accomplishments during your time in office, especially as Finance Minister in the 1990s when you were instrumental in bringing about (with due credit to Chretien for support of the effort) two enormous changes that benefit Canadians - the elimination of the federal deficit with significant debt reduction and the reform of the Canada Pension Plan to put it on a sound footing.

Since you are evidently frustrated at not being able to stay in power and still rarin' to go, may I suggest you consider refocusing your efforts away from African and Aboriginal development, laudable as those causes might be, to something far more important in that it affects every human being - financial reform and debt control on a global scale. Canada is unique among the major developed countries of the G7 in its low level of debt per capita. The 1990s debt reduction you started is exactly what allows the government to now launch stimulus spending with much less future negative impact on government finances than other countries like the USA which are starting from a quite high debt load.

Of course the debt reduction cannot start right away until economic recovery starts. In the meantime, there is reform of the financial system to ensure that the credit crunch "can never happen again" (to use that painfully worn expression). As Finance Minister you were willing to tell the big five Canadian banks to take a hike when they wanted to merge (keeping them small in global terms and maybe saving them from themselves?), which gives you good street cred in dealing firmly with financial institutions.

Governments around the world, starting with the biggest, our friends the Americans, will sorely need the advice of someone who actually did it, to reduce debt once the recovery is underway. As you well know, it is hard for governments to turn off the debt tap with real reductions in government spending. But that is essential since the credit crisis has shown us that it isn't enough for us Canadians to be virtuous as the errors of our neighbours come to have negative consequences on us too. Your experience could be invaluable.

So Paul, your book shows how you wanted to be Prime Minister for a long, long time and how disappointed you are that a little something out of your control named Sponsorship scandal derailed all your plans.

Maybe it could all fit together somehow. With apologies to the Rolling Stones,
"You can't always get what you want /
And if you try sometime you find /
You give what we need"
Your service to fellow man would be far greater than you ever imagined.

PS if that doesn't work out, a more modest but extremely valuable task would be figuring out how to rescue all those underfunded corporate pension funds so many Canadians depend on for retirement

PPS I was amazed to see that a former PM's book doesn't yet have a single review on Chapters or Amazon (Jean Chretien's has one)

Tuesday 17 February 2009

The TSX in 2009: fewer, bigger companies = less diversification and more concentration risk

Canada's prime public equity market the Toronto Stock Exchange has been progessively shrinking and concentrating over the last few years. It isn't just the credit crisis at fault. Look at the figures below on additions and deletions to the headline index called the TSX Composite (source is the Standard and Poor's download table of adds and deletes, which seems to be somewhat incomplete since my backwards calculation doesn't quite jive with official figures I found for a couple of points in time, but the trend is nevertheless clear).

The Composite includes or excludes companies based on several criteria, notably liquidity and market weight (i.e. if the shares don't trade often enough and the market cap is too small compared to the overall market then they are out). The shrinking Composite reflects fewer companies taking up more market space.

Though I have not traced the numbers back further than 2007, there is even some evidence that the overall equity market in Canada is shrinking. The total of TSX-listed issuers dropped from 1613 from the end of 2007 to 1570 on December 31st 2008 and 1555 on January 31st, 2009 (from the TSX 2008 Yearly and January 2009 Monthly Trading Summaries). The same downward trend is evident for the number of issues (securities) listed on the TSX.

  • fewer IPOs (none in the last half of 2008, according to this PriceWaterhouseCoopers press release)
  • a continuing slow stream of buyouts causing delistings (11 in 2008 by my count of the S&P deletes), a few of which seem to be due to income trusts selling out
No doubt the credit crunch exacerbated the situation in 2008, which PWC says will not change much for the first half of 2009, but the longer term trend suggests something else must be at work. What that reason is I don't know (possibly partly the influence of huge pension funds deciding to go progressively more overseas to invest?) but it isn't good for the average individual Canadian equity investor. Why?

Insufficient Diversification - Popular ETFs that track the TSX are more concentrated than ever. The iShares TSX Composite (symbol XIC) has about 20% of its value in the top five holdings alone and 73% in only three dominant sectors - energy, financials and materials. For investors who work in those sectors and whose job security goes along with prospects for their industry and company, their financial fortunes are distinctly concentrated and less diversified than they should be.

Potential Actions for the Investor
  • complement XIC with iShares Small Cap Index Fund (symbol XCS), which has only 9% in its top five holdings amongst a broad base of 207 companies, about 130 of which do not appear in the Composite index; the negative is that there is still over 60% in the same top three sectors as well as the doubling up of the 70 or so overlapping companies
  • diversify internationally in the US or elsewhere, where other sectors like manufacturing, health care and consumer products are better represented
Update March 14: The trend continues. GlobeInvestor reports that S&P will add 6 and drop 12 companies from the TSX Index as of March 23, a net loss of 6 companies in the index.

Saturday 14 February 2009

Book Review: The Empowered Investor by Keith Matthews

Professional financial advisor and portfolio manager Keith Matthews has written a darn good book, one that should be useful to most individual investors. The book explains many important principles - both things to do and things to avoid - to build a sound portfolio. At 184 pages it is concise enough for most everyone's attention span, especially those who need his advice most and are not especially interested in making a hobby of investing and spending massive amounts of time on it.

This book demonstrates successful investing based on:
  • diversified passive index funds
  • asset classes identified as 1) equities - broken down into Canadian, US value, large and small cap, International (he doesn't specify but presumably meaning developed economies) - value, large and small cap, and Emerging Market countries; 2) Real Estate Investment Trusts (REITs) - Canadian, US and Global; 3) Fixed Income - broken down into government and corporate bonds and real return bonds
  • low fee/cost funds after-tax
  • a written investment policy that considers one's life plan
I liked the visual presentation and spacious formatting of the book, its use of pertinent tables and graphs, the references to sources and further reading material.

Several things I looked for but did not find would improve the content.
  • Discussion of rebalancing the portfolio over time as asset classes move out of their initial proportions. What are practical rules - e.g. time-based once a year, or when a class varies more than a certain percentage?
  • Explanation of real return bonds as asset class, using the same illustrations and tables as for the others
  • Show sample portfolios with actual ETF ticker symbols and percentage allocations with a line or two mini-case explanation. Some people, like me, like to learn by example. On pages 57-59, the discussion of Dimensional Fund Advisor mutual funds should mention more explicitly that these funds are not available to self-directed investors, and can only be bought through advisors.
  • Chapter 12 on pension funds cursorily mentions a few principles for determining how much (what percentage) to put in each asset class. This topic is so fundamental that even an an overview book such as this must address it in more detail. I think the approach must derive from a person's overall financial condition, including his/her occupation, its stability, income level and pension plan. For example, a 55 year old civil servant with 30 years service has high job security, and a defined benefit inflation-adjusted lifetime pension plan sufficient for retirement that is equivalent to a gigantic real return bond (e.g. the present value of a perpetual $50,000 income stream at 3% real return is 50,000/.03 = $1.7 million). I'd question whether such a person should invest even a penny in fixed income whatever his/her nervousness about volatility (which I'd venture to say is higher that the average private sector worker since the whole ethos of government and its workers is to prevent, minimize and avoid risk - "we never expect praise, we just want to avoid criticism").
This second edition adds two sections: a chapter on eight common investment pitfalls (which the book shows how to avoid or fix) and a series of chapters on what he calls "advanced investing", that elaborate some really important topics - the benefits of international investing, the effects of currency changes on international investments, the value of a house over the long term and expected future rates of return.

The complete table of contents can be found at the book website The book can be purchased there as well.

Matthews was kind enough to send me gratis a copy of the book and to agree to answer some questions I threw at him. The email interview follows below and readers will be pleased to note that he practices what he preaches by holding a diversified portfolio based on asset classes discussed in the book! If you want to reach him, his website even includes his email address

My rating: 4 out of 5 stars.

Q1 - Do you think investors should always have an investment advisor? Do you use one yourself?

To begin, I am a portfolio manager that works at Montreal based firm providing discretionary portfolio management & wealth management services. This is an important disclosure in that it sheds some light on my responses.

I do not think that all investors need to have an investment advisor. If an investor has informed themselves well, have seen enough (or studied enough) economic cycles, and finally has the right mind set to control their emotions, then with the asset class investment vehicles (notably ETFs) available in the market place today;; then and only then would I feel comfortable & confident that they could build, monitor and rebalance their investment portfolios over time. At minimum, there is always a need for objective planning (retirement & estate) that these individuals could follow-up on with a fee-only advanced financial planner.

However, what I have witnessed and seen over the years is that most individual investors (novice or advanced) are not necessarily “wired” to oversee their personal investments. There is still too much performance chasing (asset class, sectors, and companies) which can hamper an investment experience. Not with standing the complexity of trying to plan and oversee a well diversified portfolio. So – I do believe that the majority of investors (large, small, novice and advanced) can benefit from a reasonably priced asset management & wealth management service…if anything simply to keep them on track and away from investment pitfalls, and to ensure that the details in the execution are taken care of.

The good news is that there is a growing group of “unbiased & objective” advisors in Canada. While a decade ago, there was minimal selection, today the list of qualified advisors submitting to principles found in the book in growing rapidly.

Q2 - Do you think investors should make any changes or adjustments in light of the current financial / economic situation?

The asset mix should have been one that was set knowing that equities correct in price every 5 to 7 years. So the short answer is “not really”. It is my view that this current economic situation as difficult as it is (and it is a difficult one) should not require any rethinking on the long-term asset mix. Investors in equities should have a minimum 10 to 20 year horizon, and should think accordingly. Gradual rebalancing from fixed income to equities should however be taking place with the new asset class levels in a diversified portfolio. If anything, I think that many investors may want to rethink the way they have invested up till now. Unfortunately sometimes it takes a crisis for many investors to want to reevaluate their portfolio, portfolio methodology or even portfolio service. I propose that investors unhappy with their portfolios should rethink the way they invest. Here are some of my thoughts on this point:

8 tips to rethink the way you invest:

- Do not build your portfolio on bold forecasts

- Do not chase past returns as they are random

- Do not invest in alternative investments as they are too risky

- Be aware of and stay clear of investment pitfalls

- Invest in asset classes and not “star managers”

- Build a diversified portfolio using asset class investments

- Hire a firm with an investment process and plan for you

- Insist on full transparency and investment reporting

Q3 - What do you hold and in what proportions in your own portfolio? ... I'm more interested in the reasoning behind it than finding out how rich you are!

I am 45 years of age with a long-term investment horizon. My asset allocation would look something like this.

25 % Short-term Canadian bonds

10% S&P/TSX 60 Index (iShare)

21% DFA Canadian core companies

9% IVV (iShare)

7% DFA U.S value companies

6% DFA U.S. small companies

9% VEA (Vanguard Europe & Asia)

7% DFA international value companies

6% DFA international small companies

Q4 - How do you suggest coping with multiple and uncertain time horizons e.g. retirement (people sometimes don't retire when they expect), illness, kids' university, marriage/divorce, death (who knows how long they will live)? Should one have different buckets of money - short-term vs medium vs long-term? Or is it not an investment question at all - insurance the answer?

Different buckets of assets matched to different liabilities or obligations is an interesting wealth management concept. Where it is applicable – it can be used. It is an investor friendly concept that is easy-to-understand by investors. Short and medium term liabilities should be matched off with short-to-mid term secure bonds. Longer-term obligations such as legacy goals can be positioned in diversified equities.

Uncertain time horizons is the most challenging concept in this questions. This is an element of “human, life and work related risk” that is often completely out of our control. I do not think that there is an easy way around this one. However, I do think that you always have to plan for the longest period but also have to ideally have a short term contingency plan in place (ie available secure funds) – so that if something was to happen, long-term assets would not need to be used. For any individual who finds themselves in the unfortunate position of having to retire earlier than expected – I think that there are some tough choices to make. If a person is able to still work – then they must pursue new work opportunities (even if it is less interesting and less pay than the previous job). If this cannot materialize then they must prepare themselves to reduce lifestyle or stay in the work force (perhaps even on a part time basis) for many additional years. Unfortunately there is no magic or easy way out.

Health and disability risks should be managed by insurance.

Q5 - In chapter 18, you mention expected future real returns for US and Canadian equities of 3.5% to 4.5% over t-bills in the coming decades. What would be the numbers for the international equities that you suggest a portfolio should have for proper diversification?

On page 148 International equities are also mentioned with U.S. and Canadian as having t-bills + 3.5% to 4.5%.

For a Canadian investor, having 50 to 70% of their total equity weighting in non-Canadian equities makes sense. This percentage removes bonds from this calculation. However, many Canadians however have a “home bias” and have higher Canadian equity concentration levels. So there is an opportunity for Canadians to shift away from Canadian centric and commodity weighted portfolios to a more diversified global portfolio.

Q6 - You say in the intro that writing the book has been an amazing experience? How? Did any of your thoughts or philosophies of investing change in the course of preparing the book?


It had been an amazing opportunity for many reasons. Firstly, the book writing experience has made me a better communicator of investment concepts. Writing a book forces the writer to cut through the noise and the blur and get to a point of clarity and consistency – and this is good. I feel that I experienced this. The investment business is often complex and cloudy for investors. Writing a book and/or providing a clear investment message (in a world of complex marketing) was a challenge that I enjoyed and wanted to undertake.

Secondly, my clients provided much input into the language used in the 10 Principles to Successful Investing and obtaining this feedback was an absolutely terrific personal experience. This feedback was so much appreciated and in essence validated the concepts that would be further expanded upon in the book. If it was important to my clients and had an impact on them, then I knew that the book would connect with – real people.

Lastly, I knew that while I was writing the second edition, that the content (and the style of the content) would have a positive impact on investors. The feedback from many readers of the first version surpassed my expectations and I received many email notes of thanks from readers across Canada – and so I had this in the back of my head while I was writing the New & Expanded version. This was a very motivating thought and I enjoyed that.

Monday 9 February 2009

Great News from Claymore for ETF Investors

It is wonderful to read in an article by Rob Carrick in the Globe and Mail that Claymore Canada will be offering investors in its ETFs the possibility to do three things previously missing and which in my opinion add significant value:
  1. Pre-Authorized Cash Contribution (PACC) plan to make regular monthly, quarterly or annual purchases of new shares
  2. Dividend Reinvestment (DRIP) from existing holdings into new shares
  3. Systematic Withdrawal Plan (SWP) to make regular withdrawals/sales of existing shares to generate cash
This considerably levels the playing field with mutual funds for small investors since all this will be done without charge - Free! The smaller the amount you have to invest the bigger the relative benefit since flat rate commissions at discount brokers would eat up more of small amounts to the point that it really did not make sense for trades of ETFs under $1000. The other big advantage is that one can put more of the mechanical part of investmenting on auto-pilot.

The article says Barclays, creator of the more popular market dominating iShares, is considering doing something similar. Yes, Please! That would really help force the mutual fund industry to lower its fees.

Questrade and Qtrade also lose a competitive differentiator. Their DRIP service would become un-necessary if iShares follows suit.

Wednesday 4 February 2009

Save the Planet: Drink Tea and Beer not Coffee

Move over Carbon. Make way for Water. It's not just carbon emissions that matter. The amount of water used to make things, especially food, is already a big issue and getting bigger. BBC has a neat illustration (without citing the source of the numbers) of water consumption for common household items.

It turns out that a cup of tea (250ml?) requires an amazing 30 litres of water when you add up the whole life cycle from growing the plant to consumption. But astounding as that is, coffee requires more than four times as much - 140 litres. Do you feel environmentally bloated?

Beer checks in at 150 litres on BBC but usually beer bottles contain more than 250 ml so one might argue that drinking beer is more environmentally friendly than coffee. The number for beer is only 75 litres per 250 ml glass.

Of course, total environmental impact goes beyond one dimension and therein lies a serious problem for those who want or are willing to alter their consumption patterns but are wary of jumping onto the latest fad advice that on closer examination turns out to be poorly analyzed. The tea & coffee example seems to have some substance - this credible looking study at corroborates the BBC numbers.

And what about the carbon footprint of tea and coffee? Is tea better there too? My googling was unsuccessful in finding numbers. This discussion on about trying to figure it out for tea alone suggests the answer isn't easy to determine.

Water has become such a valuable commodity in such short supply that countries with deficits are turning to renting land in other countries to grow their food, since agriculture usually loses out in competition with industry (see BBC's The pending scramble for water). Maybe the Chinese will want to rent out Saskatchewan?

Good sites: World Water Council,

Monday 2 February 2009

Residence: a word with too many meanings for Expats

`When I use a word,' Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean -- neither more nor less.'

`The question is,' said Alice, `whether you can make words mean so many different things.'

`The question is,' said Humpty Dumpty, `which is to be master -- that's all.'

Lewis Carroll, Through the Looking Glass

Perhaps Lewis Carroll anticipated the problems of expats and the use of the word "resident" when he wrote these immortal lines. It is easy to empathize with Alice as she struggles to make sense of Humpty D's arbitrary use of language and his haughty motive of controlling her.

The word resident is fraught with many meanings as it is used by bureaucracies and applied to us ordinary Alices. Imagine Alice's problem compounded by two (or more!) countries using the same word with different meanings that have real effect on things like taxation, health care, driving, social benefits, employment, immigration, marriage, children, estates, trusts and on and on. Arrgghh!

For the benefit of other expats like me, today's post addresses the issue with respect to one country - Canada, and one province within it - Ontario. Other provinces will have similar but, of course, not identical rules and interpretations.

Residence in everyday use means something like "live in a place", which is fine until governments mould the idea to fit who they want to include or exclude. We end up with details that are drastically different, almost turning the words inside out. Whereas in Humpty's mouth the motive of control seems harsh in its explicitness and brashness, in government hands the same justification becomes one of the "necessity to attain policy aims" or some such euphemism. The end result for common folk is unfairness and confusion.

The Many Meanings of Residence in Ontario Canada
The charts below show what I have found out to be the different rules and tests for what constitutes "residence", used loosely where various types of government and some private organisations apply the concept of living somewhere. Note that some of these could be wrong despite my best efforts and showing of original sources. I'm not a lawyer and these things are so darn complex, you should double check before taking any action.

Most of the definitions sort of overlap but the details are devilish and each definition has its nuances. There seems to be a significant divide between those relying on physical presence (of varying amounts of time) as the main criteria, and the tax people who rely on ties to the country.

It is amusing to read that Elections Canada claims that a person can have only one ordinary residence at a time. In the tax world and amongst different countries that's not true. Don't know if English law is similar enough to Canadian law but this UK reference says "it is well established that it is possible to be ordinarily resident in more than one country at the same time." (PM North and JJ Fawcett, Private International Law, 13th edition, 1999, page 170 and footnotes a dozen cases as proof).

The result of the divergent rules, for instance, is that it is easy to end up paying all federal and provincial taxes, including Ontario's health premiums, on worldwide income, some of which may not even have been earned in Canada, and yet be ineligible for Ontario health care. Who knows if you will be eligible in the foreign country or if it even offers health care. Is that fair?

Legal scholars North and Fawcett (page 139) make another statement: "Problems in relation to residence would disappear if this concept were to be replaced by the simpler concept of presence." But apparently this has been rejected in the UK and in every other country too. Instead, governments and courts have, over decades of law-making, regulation-making and jurisprudence, on the principle of taking into account the social and economic requirements of a situation, created a sophist's delight that requires 1000 page books (that's how long their book is) to explain the simplified version of reality, leaving the ordinary person in a confusingly impossible state.

It would be completely understandable if many were not so kind-hearted as Alice, who realized Humpty D's precarious sitting spot and worried that he might fall off his perch.

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